personal finance banking loans/borrowing money budgeting investing planning insurance taxes
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Personal FinanceBankingLoans/Borrowing MoneyBudgetingInvestingPlanningInsuranceTaxes
BankingMany different types of banks:
NationalStateCommercialCommunityFederalThriftsSavings and LoansTrustsCredit Unions
BankingBanks take in your deposits and in return pay you
interest. They takes deposits and make loans at a higher rate of interest. The difference is known as the spread.
Largest banks have 100s of billions and some over $1 trillion in assets.
Retail banks provide many servicesFDIC – Federal Deposit Insurance Corporation –
govt. agency that insures consumers against bank failuresPrevents a run on banksEach depositor is insured up to $250,000 for an
account at each bank.
BankingThe Rule of 72 – divide any interest rate by
72 and that’s how many years it will take to double your money (6% - 72/6=12 years)
Savings Accounts – most basic account to deposit cash and collect interest (rates are low)Good place for money if you will need it soon
or if you cannot afford riskier investmentsOther savings accounts are CDs and money
marketsBest rates can be found online at
www.bankrate.com
BankingMoney Market Accounts – vast market of
ultra-short-term, highly rated debt obligations issued by the govt., corporations and financial institutions that are tradedMoney markets are very safe, FDIC
protected, and have low rates a little higher than savings accounts
Need to keep a minimum balanceWithdrawals are limited
BankingCertificates of Deposit – CDs – time
deposits kept for a certain period of time in exchange for a better interest rate3,6, & 9 months as well as 1,2, & 5 yearsCD matures when period endsThe longer the maturity, the higher the
interest (typically)Early withdrawal penalties
BankingChecking Accounts – demand deposits that
give you the right to “demand” money upon presenting a checkChecks are tracked by numbers and are
processed through the national banking system
Generally checking accounts pay no interestBalance a checkbook to have good financial
managementFee if you are overdrawn of $25 or moreRecord all withdrawals for accuracy
Banking
BankingATM Cards – automated teller machines
Save banks $ and they can collect feesETF law limits losses if your card is stolen
Debit Cards – look and can act as credit cards, but take money directly from your accountMust have enough money in your account for
it to go throughWorks like electronic cash with no interest
chargesMerchants typically like them because of no
fees
BankingOther Banking Services
Vacation and Christmas ClubsSafety Deposit BoxesCredit CardsMortgagesCar LoansPersonal LoansTrustsBusiness Services – credit cards, loans,
leases, line of credit, checking
BankingOnline Banking
You can download account info., pay bills, transfer money, order checks, stop payment on a check, open a CD, find an ATM, get a home or auto quote, apply for loans, etc.
Can either access a regular bank or one that only exists electronically
Internet based banks have lower costs and can give you better interest rates
BankingThings to consider when choosing a bank
Depends on how you bank and what services you need (Affinity)
Relationship with a bank – examplesWhen is it open – late & weekends?What are the minimum balances and
associated fees?How is their internet banking and/or ATM
service?Many banks are competing to have you as a
customer.
BankingBreaking up with your bank
Moving, fees, getting married or for whatever reason
Open new account before you close the old account
Balance your checkbook so you do not overdraw
Notify companies where you automatically deposit or pay as this may take a few weeks
Make sure your old bank has your contact information for tax purposes or any other problems
Don’t forget your safety deposit box if you have one.
Borrowing Money
Borrowing MoneyCredit can be easy to come by and when
used prudently for purchases with long-term value, can be wise if you are smart about it.
Debt can tear your life apart, destroy friendships and marriages, ruin your retirement, and cause you to lose your home.
Millions each year file for bankruptcy or default on their loans
Examples – student loans and upside down mortgages
Borrowing MoneyDebt – You borrow money you don’t have to
but something you otherwise can’t afford to pay for now. The purchase may be small (McD’s) or large (house).
Borrower = youLender = person or company that lent you
the moneyPrincipal = money borrowedInterest = the charge the lender imposes
for the principalRepay over month (credit card) or decades
(mortgage)There is good debt and bad debt
Borrowing MoneyGood Debt – improves your life for a long
timeAn affordable home – most valuable asset of
most AmericansEducation – future earning power can be
worth investmentRental or investment real estate – real estate
has typically been a good investment (they aren’t making any more land)Get paid rent which should make you money
AutomobileSome say car is a bad investment because it
depreciatesA car is a necessity that improves standard of living
and gives access to better schools and neighborhoods
Can commute to a better paying job
Borrowing MoneyBad Debt – if you consume it, if it loses
value over time, or if you have to feed it, it’s bad debtAll random daily purchases (meals, gas,
groceries, electronics, etc.)Small purchases should be made with cash
instead of credit because they add up over time and can be 1,000s of dollars.
Debt can grow and control your life with excessive interest
Paying off credit cards each month is a possibility
Borrowing MoneyCredit Cards
Allows you to purchase goods and services when you don’t have the cash
Society increasingly going cashlessCC company fronts you money which is
interest free if paid within 30 days (there may be a fee)
American Express, Visa, MasterCard and Discover are the largest
Thousands of other cards from banks and stores
Many cards have rewards – airlines, college, cars etc.
Borrowing MoneyCredit Cards
Go astray when you rely on cards to live a life you cannot afford
Keep track of all monthly expensesMonitor your accounts for fraud or identity
theft
Charge Cards – different than a credit card in that you can charge what you want and it is paid off each month.American Express is the best example. You pay an annual fee and can receive
rewards
CREDIT CARDSCredit Card Act of 2009Developed by:
Federal Reserve BoardOffice of Thrift SupervisionNational Credit Union Administration
Credit Card$874 billion in CC debt
Average rate %14.62
Average college student almost $3,000 in CC debt
CREDIT CARDSNo Double Cycle Billing
Pay interest on previously paid balancesNo Interest Rate Increases in 1st 12 monthsPromotional rates must last 6 monthsNo Interest Rate Increases on pre-existing
balancesIncreased rate only applies to new balancesException – more than 60 days late
Credit CardsMust give 45 days notice before increasing
your interest ratePreviously 15 day notice
Interest rate could increase if you don’t make the minimum payment within 30 daysMust receive 45 day notice
Increased rate must be reviewed and lowered if review shows improved payment habits
Credit CardsPayments above the minimum must be
applied to highest interest rateNo fees to pay bill by phone, mail or online
unless it is on the due datePayments are due on the same day each
monthSundays?
Credit CardsNo over-the-limit fees unless you opt in
(transaction would be denied)Only one over the-limit-fee is allowed per
billing cycle & transaction
Credit CardsStatements must be sent 21 days before
the due datePayments received by 5:00 p.m. on the due
date are on timePayments are on time when received the
next business day after a holiday or weekend
Removal of new accounts from your credit report
Credit CardsMust disclose how long to pay off card
making minimum paymentMust include what the savings would be if
paid off early
Credit CardsUnder 21 must show proof of ability to
make paymentsCo-signer needed if cannot payCould push students to payday lenders and
pawn shopsMust stay 1000 feet from college campuses
Credit CardsNo rate capDoes not apply to business and corporate cardsNew fees
Lack of useNot using enoughAnnual FeePaper statementCustomer service callsIncrease credit limit requestCash advancesSecond card
Credit CardsAverage family over $8500 in CC debtMinimum is usually 2% of your balanceAt 14% it would take 36 years to pay off
this balance
Borrowing MoneyBad debt should be no more than 15% to 20% of
your income.Debt ratio is your total monthly or yearly payments
divided by your total monthly or yearly salaryExample $787.00 in monthly debt payments on a
$40,000 annual salary or $3,333 monthly salary = 24% debt ratio
Banks want a total debt ratio of no more than 40% for a mortgage
Using the above example a limit of $546.00 a month for a mortgage would be 40% or 30 years on $115,000 at 4%
Borrowing MoneyMaintaining a good credit report and credit score is vitalInterest rate you are charged and loan amount depends
on income and credit scoreEquifax, Experian and Trans Union provide credit scoresFICO or credit score is based on a mathematical formulaScores range from 300 to 850.The higher your score the better.The lower the more of a risk and the higher interest rateMedian score is 723 with 750 and higher being a good
scoreYou get 1 free report a year at www.myfico.com or within
60 days if you are denied financing
Borrowing MoneyWays to keep or improve your credit score
Pay bills on timeKeep outstanding balances lowClosing cards can hurt your scoreMany cards may hurt your scoreThe longer you keep credit cards the better
for your scoreYou may contest discrepancies in your
report
Borrowing MoneyRent vs. Borrow
RentDon’t expect to live in one place for longNot interested in property upkeepLarge debt concerns youWant the amenities of apt. complexesDon’t mind that rent will increase
BorrowExpect to settle down and establish self in communityDon’t mind upkeep or paying for itDon’t want to pay landlord 1,000s of dollarsWant tax breaks and possibility of profitingHouse payment will be fixed
Borrowing MoneyA number of factors go in to buying a houseOnce you qualify for a mortgage you have
closing costs which are put on a settlement sheetClosing costs
Points or origination feesProperty taxesEscrow feesHomeowners insuranceTitle InsuranceNotary feesWater and sewerTransfer taxes
Borrowing MoneyCan refinance your house to a lower rate
and or to use equityCan borrow against the equity in your
homeCan make an extra payment to reduce
interest payment
Borrowing MoneyCar buying (average new price $30,000)What do you need in a car?A car will only decrease in valueNegotiate the best price and use the internetCar loans are competitive and you should know
what you can affordLeasing lets you get more car as you rent the
portion of the car that you use with interestResidual value is the value of the car at the end of
the leaseExtra mileage and wear and tear can cost $$$You either turn the car in or you can buy it
Borrowing MoneyBankruptcy – complete or partial inability to repay all or part of
your debt (creditors)Federal Bankruptcy Court protects you from losing home, creditors
and wage garnishmentReasons for bankruptcy – overextended, unemployment, medical
expenses, and marital problemsBankruptcy should be last resort as it limits you in many ways and
is on your credit report for 10 yearsChapter 7 Bankruptcy is a liquidation where assets are sold and
creditors paidChapter 13 Bankruptcy is a reorganization where you can keep
property and have a plan to pay all or part of your debt as approved by a judge
Home (usually), furnishings, clothes retirement accounts and pensions are exempt
New law forces most people in Ch. 13 meaning you need to pay more and have to see a credit counselor
BudgetingPeople don’t like to budget because it is
confining, but they need to do it.Shows you what and where you are
spending your $.Call it a spending plan instead of a budgetMatches your income with your fixed
expenses and lets you decide on discretionary expenditures and savings.
It takes a few months to develop and use a plan.
Emergency fund of 3 months to a year’s salary should be a target.
Budget worksheet sample- online
InvestingInvesting should not be gamblingNYSE has buyers and sellers exchanging
over a billion shares or more per dayThere are many other stock exchanges
(NASDAQ and AMEX) along with brokerage houses like Merrill Lynch and Morgan Stanley.
Online investing like E-Trade along with various mutual funds and banks use the stock markets
InvestingBrokerage firms – analyze companies, pick stocks
and execute trades for many types of customersPeople have different investing philosophies
depending on several itemsIndexes measure groups of stocks
Russell 2000 = small companiesWilshire 5000 = all U.S. companiesCertain geographical indexesNASDAQDow Jones Industrials – DOW 30 large cos. picked
by WSJS & P 500 – 500 largest U.S. companies
InvestingStocks – partial ownership of a company
Over time profits and growth should increase the share price and lead to a dividend or share of the profits
$3000 of Microsoft in 1986 worth $800,000 today
Vote on company issues with your sharesCompanies have stock letters
Stock table – how to read
InvestingBonds – IOU from a company, the govt., or
your hometownGenerally safer than stocksPrice (cost to buy) and yield (% you earn in a year) –
inverse relationshipCollect interest until the bond matures, then you get
principalBonds are rated for riskTreasury Bonds – bills, notes or bonds depending on
length of issueMunicipal Bonds – issued by state and local govts.
(sewer, schools etc.)Corporate Bonds – issued by companies
InvestingMutual Funds – investors pool money to buy
investments that are managed by professionals for a feeThousands of funds and trillions of $sTypes of funds
Index Balanced – mix of stocks and bondsLife Cycle – target a retirement dateSector Funds – target certain segments of the marketMoney MarketExchange Traded Funds (ETFs) – traded like stocks
Dollar cost averaging – lower the price the more shares you can buy
Asset Allocations – pick mix of investments in a fund
PlanningLong term planning for a number of things such as
college, retirement, a car, house etc. is important.15-20 years you will live after retiringFunding your retirement should be your 1st priority.70% to 100% of income to retire = 10x your annual
salaryNet worth – total assets-total liabilities (spreadsheet)Social Security
$20K = $699/month$40K = $1,046/month$60K = $1,392/month$80K = $1,626/month$100K = $1,778/month
Planning401K – pre-tax money that grows without
taxes until retirementTax and 10% penalty for early withdrawal
(59 ½)$17,500 limit on contributionsCan select various investment optionsEmployers sometimes contributeCan loan from 401K
PlanningRoth – after tax money, tax free growth and
tax free removal at retirementBenefits many especially if in lower tax
brackets3 groups to seriously consider Roths
1. Young workers2. Parents or grandparents saving for
college who will be of retirement age when kids go to college
3. People who want to pass money to heirs (do not have to begin withdrawals by 70 ½ like most retirement plans)
PlanningSEP IRAs and KEOGH plans – used for self-
employed
Individual Retirement Accounts (IRAs)
IRAs have various investment and tax options
Reverse Mortgage – collect money on the value of your house either as a LOC or a monthly payment. Must repay it either through the sale of your house or other funds.
PlanningCollege Planning
Calculators are online to help with college planning3 types of accounts
Coverdell Accounts – work like IRAs, not tax deductible, no tax on interest if used for education, cons – contribution limits and income limits
529 Plans – beneficiary has no claim to $, each state has one, can use any states, can contribute much more $, can either be prepaid or a savings plan with investment options
UGMA & UTMA – Uniform Gifts or Transfers to Minors Act – money put into an account that is taxed and $ goes to child when no longer a minor
Life Insurance – can put extra $ into life insurance that doesn’t count towards financial aid and then borrow that money for school
PlanningFinancial Aid
Grants and scholarships – do not have to pay back
Loans – subsidized or unsubsidizedFederal Work Study Program – part time work
at school
PlanningEFT – Expected Family Contribution
35% of student’s assets50% of student’s income2.6% to 5.6% of parent’s assets depending
on their age22% to 47% of parent’s income
Assets for retirement and primary residence are not counted
Life insurance is not counted
InsuranceInsurance gets no respect until you need it and
then you’ve had a bad day.Insurance buyers are grouped by risk and actuaries
calculate insurance rates.Risk is shared among a group of people who pay
premiums.Premiums are invested.Coverage – how much money the policy will pay outPremium – cost of coverage – preferred, standard,
substandard & uninsurableDeductible – how much you have to contribute on a
claim (higher deductible = lower premium)
InsuranceLife Insurance
Term and Cash-ValueTerm - cheaper, in place for a limited amount
of time, could expire before you doTerm can usually be converted to cash valueCash Value - 4 to 8 times cost of term, has a
savings portion, remain in effect forever, can loan against them, break even in 14 or 15 years
Lapse – when a policy expires due to not being paid
InsuranceWho may not need life insurance?
Single people with no dependentsWorking couple with no kids who don’t need the other’s
incomeRetirees with no financial obligationsWealthy people with large estatesChildren unless they make $$$ or you want it for their future
Why buy life insurance?Dependent childrenMarried to a non-working spouseYou have other people you supportYou have debtsYou want to maximize your pensionYou have business partners
Insurance5 to 10 times your annual salary neededDo not buy as an investment (usually)Buy term and invest the differenceAnnuities – paid a set amount of money for
a set period of timeMany different types
InsuranceHomeowner’s Insurance
Required by lenderInsure to replace damage to home or loss of personal
itemsActual Cash Value vs. Replacement CostKeep a home inventory in a safe place
Automobile InsuranceCar is biggest liabilityParts of a policy: liability, collision, comprehensive,
uninsured, underinsured, medical and personal injury protection
States set minimum requirementsShop around for ratesGood credit may equal lower rates (other factors)
InsuranceWays to lower ratesHomeowners – deadbolts, sprinklers, alarm,
fire alarm, fire extinguishers, smoke detectors, don’t smoke, & home inspection
Automobiles – multi-car discount, avoid tickets, anti-theft devices, anti-lock brakes, airbags, driver’s education, good grades, electronic payment, certain occupations, marriage & bundling policies
Taxes Payroll – federal, state, local, SS, Medicare, Medicaid, EMT Gas Property (school, county & local) – cars and RVs in some states Sales Realty transfer Entertainment tax Vending Use Occupational privilege Capital gains Consumption – hunting license, hotels, toll roads, etc. Inheritance Corporate Permits and fees (marriage, building, zoning, etc.)
Taxes
Taxes
Taxes
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